Separate eligibility from the amount of the claim
For FY 2025–26 and AY 2026–27, section 35(2AB) of the Income-tax Act, 1961 covers eligible biotechnology companies and eligible manufacturers or producers outside the Eleventh Schedule exclusion, subject to statutory conditions. For qualifying expenditure on an approved in-house facility, the deduction is equal to eligible expenditure, not the historical weighted percentage. The proviso has applied this 100% measure from AY 2021–22. Land and building cost is excluded under this route. Check the corporate tax regime before calculating a claim: sections 115BA, 115BAA and 115BAB restrict this deduction in their respective computations.
Read the applicable text: Income-tax Act, 1961: section 35(2AB) and corporate regime provisions CBDT Notification 29/2016: Rule 6 and forms CBDT: notified ITR-6, Schedule ESR and Schedule BP.
Build the approved-facility and cost files
Match the legal entity, site, approval period and activities to the expenditure ledger. Check the agreement with the prescribed authority and the separate, annually audited accounts for each approved facility. Rule 6(7A)(c) requires Form 3CLA to be furnished electronically to the Secretary, Department of Scientific and Industrial Research by the applicable return due date specified in Explanation 2 to section 139(1). Under the notified mechanism the prescribed authority’s Form 3CL Part A deals with facility approval and Part B quantifies eligible expenditure for the year; Form 3CLA is the accountant’s audit report under the rule. Under Rule 6(7A)(ba), the prescribed authority has 120 days from approval for Part A and 120 days from submission of the audit report for Part B to furnish Form 3CL to the jurisdictional income-tax authority. A facility approval does not show that every purchase order is eligible.
Reconcile the differences before filing
Record book expenses, supported eligible costs not debited to profit and loss, excluded costs and unresolved differences in separate columns. Verify the period and version of the authority’s reporting, including any correction, rather than assuming a figure from another year applies. Do not claim expenditure under another provision in addition to section 35(2AB) in respect of the same qualifying expenditure.
Use the notified return bridge
In AY 2026–27 Schedule ESR row vii identifies section 35(2AB). Column 2 records the amount debited to profit and loss, column 3 the allowable deduction and column 4 the allowable deduction minus the P&L debit. The Schedule ESR total difference at x(4) feeds the additional deduction in Schedule BP item 29 where positive. Where the aggregate allowable amount is less than the debit, the notified note points to the addition in item 24. Reconcile any other book-to-tax adjustments so a difference is reflected once. The illustrations assume supported eligibility where specified and no other ESR rows unless stated.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Qualifying cost already expensed
₹24 lakh is charged to profit and loss and supported as allowable. The row’s difference is nil; the computation should not deduct another ₹24 lakh.
Illustrative example 2: Exclude land and building
An approved-facility project ledger of ₹75 lakh includes ₹20 lakh for land and ₹15 lakh for a building. The remaining population is ₹40 lakh before verifying eligibility.
Illustrative example 3: Positive ESR difference
The relevant P&L debit is ₹30 lakh and supported deduction is ₹38 lakh, including eligible cost not debited. The row difference is ₹8 lakh. With no other ESR differences or overlapping adjustments, the additional deduction flows to Schedule BP item 29.
Illustrative example 4: Negative ESR difference
P&L debit is ₹46 lakh and supported deduction ₹40 lakh. The row difference is minus ₹6 lakh. With no other ESR differences, reconcile the ₹6 lakh increase in Schedule BP item 24 rather than claiming a negative deduction separately.
Illustrative example 5: Open authority-report mismatch
The company identifies ₹52 lakh and the authority’s annual quantification shows ₹47 lakh. Isolate the ₹5 lakh mismatch and investigate evidence and applicable procedure before taking a filing position.
Illustrative example 6: Regime gate
A normal-regime comparison shows ₹35 lakh potentially allowable before final checks. If the company validly uses a regime that prohibits section 35(2AB), the special deduction is nil under that regime. Analyse the ₹35 lakh difference and any other tax treatment independently.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the company’s tax regime | Election and computation evidence |
| 2 | Verify eligible business and statutory exclusions | Activity and product records |
| 3 | Confirm approved facility, period and entity | Authority approval and agreement |
| 4 | Build a site-specific cost ledger | Invoices, payroll and project records |
| 5 | Identify land, building and other excluded amounts | Asset and expense reconciliation |
| 6 | Check separate accounts and Form 3CLA evidence | Audited records and filings |
| 7 | Match Form 3CL approval and quantification | Authority’s report and any correction |
| 8 | Reconcile eligible amount to the P&L debit | Book-to-tax schedule |
| 9 | Tie Schedule ESR and BP without double counting | Notified return and computation |
| 10 | Escalate unresolved differences before filing | Exception record and supported position |
Sixteen practitioner FAQs
1. Is a facility approval enough to fix the deductible amount?
No. Reconcile annual expenditure and authority quantification separately.
2. Does the old 150% deduction apply for AY 2026–27?
No. The applicable proviso provides a deduction equal to qualifying expenditure.
3. Can a software company assume eligibility merely because it undertakes research?
Check the business categories and other statutory conditions.
4. Does a manufacturer’s approval extend to every site?
Check actual scope, locations and periods.
5. Is land cost included?
Section 35(2AB) excludes land and building costs.
6. What is Form 3CL Part A used for?
The notified rule uses it for the approval report.
7. What is Form 3CL Part B used for?
The prescribed authority quantifies the eligible expenditure for the relevant year.
8. Is Form 3CLA the same as the authority’s Form 3CL?
No. It serves the audited-accounts reporting requirement.
9. Does a book debit itself establish deductibility?
No. Test eligibility, evidence and the applicable regime.
10. Can the same cost also be deducted under another section?
Do not duplicate the deduction for the expenditure under this route.
11. Which ESR row is used?
Row vii for section 35(2AB) in the notified AY 2026–27 ITR-6.
12. Can a zero ESR difference still reflect a deduction?
Yes. The eligible amount may already be reflected in the P&L debit.
13. What if the allowable amount is below book expense?
Follow the notified ESR and BP treatment and avoid a duplicate add-back.
14. Can section 115BAA retain the special deduction?
Its computation restricts section 35(2AB); review the election and normal-versus-regime treatment.
15. What if authority records have a different amount?
Identify the variance and evidence and determine the supported procedure before claiming.
16. What should the final file show?
The facility, period, expenditure evidence, audit and authority records and a single return reconciliation.
Official sources
Income-tax Act, 1961: section 35(2AB) and corporate regime provisions CBDT Notification 29/2016: Rule 6 and forms CBDT: notified ITR-6, Schedule ESR and Schedule BP CBDT: ITR-6 corrigendum